I am not suprised Congress rejected the Bush package. It was always a long shot. The President thought he could buy confidence in the banks with a bumper injection of $750 billion from taxpayers, without understanding the politics of it, let alone the economics. He then spent the next week inadvertently undermining confidence in the financial world to try to make the case that the package was needed – the last thing we wanted the most powerful man in the world to be doing.
Meanwhile US citizens fearing for their own jobs and under great pressure in their budgets rose up against the idea of big bail outs which might leach into Wall Street bonuses or other rewards for the very institutions that helped get us into this mess.
What we need is an alternative strategy which restores confidence in deposits and normal financial transactions but give no cent of taxpayers dollars to once rich and powerful institutions and people.We need Central Banks to lend money – not give it – to institutions needing cash, and we need what money is spent to be spent on insuring the small savers and depositors where the private sector has not done this. Better still is to agree schemes which do give proper support to depositors within the private sector. In the UK we need to improve the deposit protection system urgently. We need the Bank of England to lend against proper security where cash is needed, and we need orderly mergers and take overs where some institutions are too weak.
Many banks worldwide need to raise new capital. The sooner the better, as markets are not keen on financing banks in these conditions, and it is getting more difficult each day. Banks just have to swallow hard and sell shares at prices lower than they are used to, to get the shareholder money they need.
The US authorities should announce Plan B as quickly as possible. Presumably they have a contingency plan for failure to win the first vote. Can they win a vote after some amendment? Can they use executive powers to take some other action without needing a vote? The Fed clearly has wide ranging delegated powers, as its provision of money to markets illustrates.
September 29, 2008
This is the Mises.org solution:
Austrian Bailout Package–Part A
1. Suspend Basil II regulations (to at least 4/2/09)
2. Cancel FDIC insurance on all demand deposits after 1/1/09.
3. Increase FDIC premiums on short term time deposits of less than one year.
4. Make interest earned (starting 1/1/09) on bank time deposits and non-governmental, non-agency, and non-authority bonds tax free (not demand deposits and MMMF).
5. Convert Fannie Mae and Freddie Mac's status from conservatorship into receivership.
6. Convert AIG's status from government owned to receivership.
7. Cancel the Primary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility (TSLF) at the end of the announced program (January 30, 2009).
8. Announce that the Federal Funds rate will be allowed to "float" at market rates starting January 30, 2009.
9. Announce that the Federal budget will be prorated beginning with the fiscal year starting 10/1/08 including all defense spending and transfer payments.
10. Restore constitutional monetary status to gold and silver to act as an alternative medium of exchange (no capital gains taxes).
http://blog.mises.org/archives/008641.asp
September 29, 2008
"Many banks worldwide need to raise new capital."
Agreed. But nobody's giving them any. Ergo, they should just swap debt for equity. Hey presto, banks recapitalised!
September 30, 2008
What are the chances that this global financial meltdown will have a destructive effect on the financial stability of the European Central Bank and the EU in general?
September 30, 2008
So what happens next after the failure of the rescue package to be passed by Congress? Do all the banks go bust, the entire financial system grind to a halt, money get scarce, trade to seize up, and everyone have to eat stale bread and drink dirty water?
September 30, 2008
There is no quick fix.Central banks have already made a quarter of a trillion dollars available to banks.
September 30, 2008
JR: "What we need is an alternative strategy which restores confidence in deposits and normal financial transactions but give no cent of taxpayers dollars to once rich and powerful institutions and people."
The strategy ought to be to establish which financial institutions are insolvent, this is a situation where the daylight needs to be shone into the financial services industry. To restore trust between lenders and borrowers, we need to know if an institution is sound. Then deal with the CDS issue, putting all CDS transactions on a public exchange would be a good thing.
Finally, it cannot be said too often, the market was down not because of the failure of the US government plan, but because of the lack of short sellers in the market to arrest the decline.
The FSA, the chancellor and Gordon Brown, did the most stupid and dangerous thing but implementing the ban. Fools!
You really shouldn't allow children to play with big machines.
September 30, 2008
I don't begin to understand the intricacies of global finance, but quite agree that George W Bush's behaviour has been extraordinarily irresponsible and stupid. It reminded everyone very closely of the exact tactics he used to justify war in Iraq by telling everyone Saddam had huge stockpiles of WMD. But since people who know him say he isn't as stupid as he looks, he might have understood that if the banks were generally confident, they'd need no money, and the more he undermined that confidence, the more money would be needed.
When he was first elected, I worried, but thought we'd be fine provided nothing really happened in the world, as it hadn't for the previous 10 years. A year later we had 9/11, and now he's signed off by trashing the whole world's economy. If only my original fears had come true, that he'd be a totally ineffectual president.
September 30, 2008
Many banks may want to raise capital. Equally there is no shortage of capital. The oil states & China have it lying around in billions. China is even willing to buy dollars with it. The shortage is in trust that money in western banks & other investments is safe. This is because we have hollowed out our actual productive capacity to create our much vaunted "post industrial economy".
The answer is to end the Luddite restrictions on any new technology & most of the old ones. However productive China is it cannot compete with us on high technology, yet. Plus we must cut the amount of the economy spent by government, probably see a drop in all western currencies & probably see some far eastern bahks increasing their presence here. Humanity has never had the capacity to produce wealth it has today but it doesn't come without doing it.
September 30, 2008
Not quite everyone Frank. When I was skint a few years ago It was not all beans on toast and cheap lager, sometimes I had spaghetti hoops and cheap cider.
The American taxpayer has spoken and so should the British taxpayers.
Other unemployed people will eat and drink better for sure.
October 1, 2008
Isn't the root of this problem the fact that totally uncreditworthy people have been given huge loans? These loans have then been packaged together and sold on as "money" with the name of the (untrustworthy) bank printed firmly on the outside?
In which case, the ultimate answer isn't messing about with the current mess. It is, surely, to make sure that the people who the local banks deal with are trustworthy? Bring back Mr Mainwaring from Dad's Army!
Then, surely, there is the matter of the Banks themselves being trustworthy? Isn't part of the trouble here the Big Bang when totally unknown people with doubtful morals (Gordon Gheko) took over the banking and money system? It was not like this in the heady days of the British Empire when, as the Stock market's motto reminds us "My word is my Bond". Banking ought not to be just about making money: it is far too important (as we now see quite clearly) for that. Bankers (Mr Mainwaring again) ought to be people we slightly fear and respect because of their transparent honesty. At the moment, even the American voter has seen through them. If bankers were respected for their honesty, the American loan would have waltzed through Congress.
Soon, no doubt, the question will be whether the Chancellors/Governments themselves are trustworthy as the Treasuries run out of money. This can happen all too easily. It happened to us in 1945, it happened to Germany in the 1920s, it even happened, in Argentina quite recently. As I understand it, the 1970s weren't that much cop either.
For the scholarly blogger: it happened to Louis XIV and Felipe Dos of Armada fame too.
And the Roman Empire…..